An Indian investor today has the world as his (investing) oyster and global opportunities and returns beckon. “International equities offer exposure to diverse economic growth drivers different from the investor’s home country, offering an opportunity to participate in the growth of leading companies across the globe,” says Dhaval Kapadia, director, managed portfolios, Morningstar Investment Adviser India.
Historical data indicates that global equities have delivered higher returns than domestic equities in various time periods. Over the past 10 years, U.S. equities have outperformed Indian equities by a fair margin in rupee terms. For instance, the US S&P 500 Total Return Index has given 21.3 per cent returns per annum, over the past 10 years, as on October 31, 2021. In comparison, India’s Nifty 500 has returned 14.9 per cent per annum during the same period.
“US equity markets have definitely given better returns compared to the Indian markets over the past decade,” says Nitin Shahi, executive director at financial services group Findoc.
In the past 10 years, the US Dow Jones has posted a massive return of 196 per cent, adds Rachit Chawla, CEO and founder, Finway Financial Services Company.
Investing in international markets may not just contribute towards earning higher returns but also help diversify the portfolio as international equities have a low correlation with domestic equities. A geographically spread-out portfolio based on the unique strength, opportunity or theme that the countries offer diversifies the investor’s portfolio.
Investing abroad also provides a hedge against rupee depreciation. “Given that markets around the globe perform differently year-on-year, diversification into international equity markets may enable investors to earn better returns,” says Chintan Haria, head,product development & strategy, ICICI Prudential AMC (Asset Management Company) .
However, this path is strewn with risks, all of which must be understood well before taking a step further. A lot of research must be done before testing foreign (investing) waters.
Tread With Caution
Investing in domestic markets comes with its own set of undulations but investing in foreign markets is that much more challenging. “The challenges (that Indian investors would face when investing abroad) include overcoming home country bias, deciding which country to invest in, lack of knowledge in terms of global investment opportunities, when to rebalance your portfolio, and others,” points out Haria.
Among the most important decisions an investor has to make is choosing where to invest, not just geography-wise, but also in terms of choosing the investment avenues, sectors or companies. For example, during the pandemic, Tesla made the headlines often and every time its name came up, its shares jumped. The American electric vehicle and clean energy company made to the S&P 500’s and Nasdaq-100’s list of annual winners. However, high-end stocks of Facebook, Amazon, Apple, Netflix and Google did not make it even to the 20 best performers of S&P 500.
Healthcare continues to be in sharp focus and companies dealing with medical specialties and biotechnology were among the forerunners during the pandemic and even later. For instance, companies such as Align Technology, Idexx Laboratories, Abiomed, West Pharmaceuticals Services, Catalent and Moderna were among the most sought-after stocks in the market.
Another sector in focus has been IT, which forms the majority (almost 49 per cent) of the positive returns. Communication services, industrials, financial sector and real estate follow the IT sector in that order.
Cherry-Picking Foreign Stocks
Investors looking to invest internationally should avoid very concentrated exposure, says Haria. For example, do not be confined to US technology stocks alone. When deciding to invest in the US market, base your decision on the risk-reward trade-off. “US is a very large market with several high-quality companies with strong business models available across sectors such as aerospace and defence, consumer non-durables, pharma etc.,” says Haria.
“Diversify your portfolio with both domestic and foreign investments as it will reap you a superior return possibility and also a scope to offset the effect of the domestic market,” says Chawla, who bats for US equities as that is a well-regulated ecosystem and has standardised practices.
If you are an investor looking to invest into innovative companies globally, themes such as cloud computing, e-commerce, artificial intelligence etc., which are not available in the domestic market, could be considered.
If you plan to invest directly in global equities, a thorough understanding of the company and its business is needed. Keep track of regular updates on critical information such as balance sheet, profit and loss, leverage and efficiency ratios, and detailed historical analysis, prior to investing.
“When evaluating the global landscape for investing purposes, consider growth prospects and valuations of various companies listed in these markets, rather than just the country’s economy,” says Kapadia. Many of these companies are multinationals that derive revenues from across the world and their growth prospects would vary vis-à-vis the economy of that country.
How To Invest
Selecting from among companies or sectors must be done with utmost diligence. “Prudent investment rules should be followed, be it Indian or global equities,” says Prashant Joshi, co-founder and partner, Fintrust Advisors, a multi-client family office. If you plan to invest through mutual funds, then have a thorough understanding of the asset management company and its underlying investment strategy, specifically in terms of suitability of the risk and returns profile.
“Seasoned investors with a reasonable amount of time and expertise in understanding a business may consider investing directly in global markets,” says Joshi. There are various ways to do this. One can open an account with Indian brokers that have a tie-up with a foreign broker; open an account with a foreign broker; invest in foreign stocks through apps; or reach out to asset management companies to understand and participate in their global offerings such as fund of funds (FoF), and feeder funds.
“Exchange-traded funds (ETFs) are a helpful finance tool because the fee is minimal and they replicate the exact index very well,” says Chawla. ETFs offer trading flexibility, portfolio diversification, lower costs and tax benefits. If the markets perform well, ETFs’ returns reflect the entire spectrum. Moreover, ETFs give the buyer authority to sell anytime while the market is open.
Since mutual funds are managed by fund managers, each time you want to buy or sell, you have to place a request. Plus, mutual funds have higher charges as they are actively managed. At the same time, fund managers may well have better expertise and knowledge than investors.
Another option that has gained ground in the near future is mobile apps. The digital drive has made investing abroad easy. There is a plethora of mobile apps from top brokerages that can get you started. These provide easy placement, give timely alerts, have extensive research reports, offer live stock market updates, and much more.
Consult an advisor to explore all the options and understand the pros and cons of choosing what suits you the most.
Keep In Mind Taxes And Charges
If you are investing via India-domiciled mutual funds, do note that despite being equity investments, gains from international funds are taxed like fixed income. So, long-term gains (holding period of more than three years) are taxed at 20 per cent post-indexation (excluding cess and surcharge). Short-term gains attract marginal tax rate. Dividends received are taxed in the hands of the investor at the marginal rate of tax.
If investing directly, then investments in foreign stocks are treated as investments in unlisted shares. For a holding period of up to two years, the gains are termed as short-term capital gains and taxed at the marginal tax rate; while long-term capital gains (holding period of more than two years) are taxed at 20 per cent with indexation.
In case gains are taxed in the country of investment, you may claim credit in India if there is a Double Tax Avoidance Agreement (DTAA) between India and that country.
For dividends, the taxation applicable would be the US flat rate of 25 per cent. “However, you will not be taxed again in India, as there is a DTAA between these countries,” says Chawla. The 25 per cent tax you already pay in the US will be considered as Foreign Tax Credit and can be used to offset your income tax payable in India.
Do remember that you will be buying in a foreign currency so rupees will be converted to that currency, and vice-versa. This means there will be exposure to currency fluctuations, and charges for the money transfers. As brokers and other platforms offer a service usually in partnership with brokers of a foreign country, the charges may be higher.
As more Indian investors show interest in investing abroad, more avenues are likely to come up. But the basic rules remain the same: do your homework, understand your own risk appetite, invest time in grasping the nuances, and keep an eye on taxes.
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Beyond The US
For most Indians, investing abroad is synonymous with investing in the US. But there are other global opportunities too.
Spread It Out: “Although the US accounts for over 55 per cent of the total world stock market capitalisation, Japan, the UK, Europe, and Canada are still good choices,” says Prashant Joshi, co-founder and partner, Fintrust Advisors. Spreading over geographies is the financial equivalent of not putting all your eggs in one basket.
What’s Your Approach? Many investors prefer to invest in a theme or a sector. So, if you have built or want to build a portfolio based on the theme of ESG (Environment, Social, Governance), choose countries with the highest share of ESG disclosure in annual company reports and regulatory requirements.
If the approach is valuation-driven asset allocation, then Europe, the UK, and emerging markets’ equities would be more attractive than US equities, from a risk-reward perspective, over a horizon of 5-10 years, says Dhaval Kapadia, director – managed portfolios, Morningstar Investment Adviser India.
The author is a financial journalist